The price to pay

So what happens when the rules suddenly change and everyone with a normal down payment has to go through a stress test? What if many fail? It’s just so… stressful. Like having to pee in a cup before the real estate Olympics, and then freaking out awaiting the results. Life was so much simpler when the bank just gave you more money than you could ever repay, so you could buy a first house nicer than your parent’s last.

Just two days into the Wild Bill era of mortgage-testing, and already there are consequences. ‘Secondary’ lenders are suddenly feeling good. They’re the shadowy, unregulated guys running small lending shops happy to provide down payment financing, so borrowers can get over the 20% hurdle and avoid the stress test. But at a cost. Those loans generally come with a rate of between 8% and 10%. Ouch.

Sellers are starting to get it, too. Dave in the YVR hinterland sent me a listing of a house in Surrey a couple of weeks ago when the price was trimmed by twenty thousand. “Well it was taken off MLS last week,” he now reports, “but it’s back now at a $50,000 discount. Oh..they’ve somehow added an extra bedroom too, lol. Hard to believe people in the Lower Mainland aren’t seeing what I’m seeing.”

Here’s the house, before and after. Change the picture. Add a bedroom, Drop the price. Thanks, Bill.

This is a big week for your house. (a) Rule changes Monday which will guarantee that prices start to drift lower along with sales. (b) The continued hobbling of monoline mortgage lenders, reducing competition for the banks and leading to rate increases. (c) The spectre of big lenders having to shoulder deductibles on mortgage insurance (heretofore backed solely by taxpayers), also upping rates. (d) And the bombshell news that CMHC – more responsible for inflated properties and epic debt levels than anyone else – is raising the housing threat level to code red.

Says CMHC boss Evan Siddall, as he prepares the bombshell to be delivered next Wednesday: “High levels of indebtedness coupled with elevated house prices are often followed by economic contractions. We expect Mr. (Wild Bill) Morneau’s actions therefore to support our economy. Seen this way, the resulting delay in when people can purchase their first home, or their decision to buy a smaller home, rent or stay put is rather a small price to pay.”

That ‘small price’ will be borne by existing homeowners, now in an environment where buyers can afford less, will pay less and take longer to accumulate a down payment. That’s the result of a conscious and deliberate damping of demand, just like BC’s Chinese Dude tax. No government is increasing the supply of housing, simply making it harder to buy what already exists. So people who’ve seen windfall gains fall into their laps over the last half-decade are gambling with the future if they don’t crystallize them. Actually, it may be too late. At least in Surrey. It would’ve been wise to heed this pathetic blog’s call around Canada Day to get out of Lower Mainland property – before all this happened.

Well, CMHC’s Siddall says Code Red will not just apply to the godless GTA and delusional YVR, but also (and maybe especially) to bordering communities. As reported behind the Globe’s evil paywall (Make Newspapers Great Again) yesterday, he said this: “We’re observing the spillover effects in the central markets of Vancouver and Toronto, affecting nearby markets. In Toronto, it’s affecting Hamilton and Oshawa. Outside of Vancouver, it’s places like Richmond and the Fraser Valley. You’re seeing price acceleration. At the nationwide level, the evidence of problematic conditions has become high – that’s what red means. It’s not predicting a crash.”

As explained here earlier this week, a ‘crash’ now translates into ‘a US-style crash’ which means a national drop of more than 30% in real estate values. The federal agency does not say this is impossible or improbable. It’s just “not predicting” – “at the nationwide level.” At the level of, say, Surrey or York Region, it is absolutely possible and maybe even probable. Everybody should understand that when real estate turns on its owners, those most affected live in semi-urban, suburban or satellite-city environments where prices were pushed irrationally higher by urban refugees. As stated here yesterday, detached houses in Leaside or Kits will hardly be affected.

What happens nationally to property values is of interest only to egghead Bay Street economists and the omniscient trolls with no life who inhabit the nether reaches of this blog’s fetid, oozy comment section. For normal people, it means not being able to sell the house and watching you net worth shrivel. That sucks.